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While there have been some encouraging signs in the Euro-zone situation recently as the European Central Bank has been successful in addressing the liquidity problems at banks, the crisis is far from over. At the same time, there is a possibility that the investors who can withstand some volatility may be rewarded in the long run, as the valuations are cheap after last year’s sell-off. A safer option to play Europe could be to invest in a country that is one of the healthiest economies in Europe and is also well positioned to benefit from the rise in oil prices. Yes, we are talking about Norway. (Read: EUFN: The Best ETF For The Euro Crisis)
This small nation is very rich in natural resources like oil, hydropower and minerals. Petroleum accounts for largest portion of export revenues and about 20% of the GDP. Norway is world’s sixth largest oil exporter and second largest natural gas exporter.
Norway has a population of just about 5 million and the second highest GDP per capita in the world. Its substantial oil reserves, very healthy fiscal/monetary balance sheet (no net public debt) and substantial accumulated wealth ($570 billion wealth fund) suggest that Norway will remain among the richest countries in the world in the foreseeable future. (Read: German ETFs On The Rise)
Norway had opted to stay out of the European Union but is a part of the European Economic Area. Still since two-thirds of Norway's exports go to Europe, the country is sensitive to any downturn there. At the same time, Norway’s banks have limited direct exposure to the most vulnerable euro-zone countries.
As a result, Norway has become an attractive target for safe-haven investors, leading to massive appreciation of the currency. Yesterday, the central bank cut the overnight deposit rate by 25 basis points to 1.5%, following a 50 basis points cut in December. Per central bank “continuing downturn abroad and the strong krone are contributing to keeping inflation low and are weighing on growth in Norway”. Since the rate cut was rather unexpected, the krone fell 1.4% against euro and 1.6% against the US dollar to its one month lows. The krone was one of the best-performing major currencies against the euro and the dollar this year, gaining 3.8% and 4.7%, respectively, before the cut. The currency had reached a nine-year high this month and its strength was hurting the export industries. Apart from its safe haven status, the currency’s outperformance also resulted from significant rise in global oil prices with which the krone has a strong correlation.
Norway economy has performed well in past couple of years, growing at an annual rate of 2-3% due to strong growth in consumer spending and recovery in the housing markets, while at the same time the unemployment has remained low. Low interest rates and fiscal stimulus have also aided the economic recovery. IMF expects Norway’s economy to grow at 2.25% in 2012, well ahead of the euro-zone which could contract by 0.5% this year. But the economy remains vulnerable to further deterioration in euro-zone situation and domestic issues like overheated housing market.
Last month the International Monetary Fund had warned that Norwegian house prices were 15 to 20% overvalued, while the house price-to-income ratio was even higher than before the last house price crash in the early 1990s.
The investors have a choice of two Norway specific ETFs that we have discussed below.
Global X FTSE Norway 30 ETF (NORW - ETF report)
First Norway single country ETF was launched in November 2010. It tracks the FTSE Norway 30 Index, which is designed to reflect the broad stock market performance in Norway. In terms of sector exposure, the fund has assigned heaviest weight to Energy (43.9%), followed by Financials (13.9%), Basic Materials (10.7%) and Telecom (10.3%). The ETF currently manages net assets of $52.2 million and charges 0.50% per year to the investors. Out of its 30 holdings, the top three account of about 42% of the holdings. Statoil (STO - Analyst Report), Norway’s largest oil company is the top holding with 21.1% weight, followed by Telenor with 10.3% weight and DNB ASA with 9.1% weight. The ETF has delivered strong performance this year, returning15.5% YTD, after a dismal performance in 2011, when it lost about 20%, owing to the problems in Europe.
MSCI Norway Investable Market Index (ENOR - ETF report)
ENOR made its debut very recently- in January 2012. It tracks MSCI Norway IM 25/50 Index, which seeks to measure equity market performance in Norway. The index used a capping methodology to limit the weight of any single component to a maximum of 25% of the index. Like NORW, the top holding is Statoil (21.3%), but this ETF is relatively less top heavy, with top three holdings accounting for about 37% weight. The other two top holdings are Telenor (8.1%) and SeaDrill (SDRL - Snapshot Report) at 7.2%. Also, it is more diverse with 57 holdings compared to 30 for NORW. In terms of sector exposure, more than half of the weight is assigned to Energy (51.2%), followed by Financials (13.0%) and Materials (8.5%). The fund has returned a healthy 12.9% to the investors since its inception. It has so far attracted $2.8 million in assets and charges 0.53% to the investors.